Economy calls for bold policy action

Even as the government sticks to its commitment to contain the fiscal deficit, a key driver of inflation, the RBI must hold its hand on rate hikes.

Inflation continues to be high and production, down. This calls for remedial action, not any wishful thinking that if winter comes, spring cannot be far behind. If the government wants to look for bright spots, it can find them. Capital goods production grew in October, after declining every month save one since April. Cereal price growth has decelerated from close to 20% to 12% and the sharp spike in vegetable prices (62%) in November is now behind us. So is the spat over sugarcane prices that had held up crushing, depressing industrial output figures for October. But a few sweet spots do not alleviate the bitterness of continuing slowdown, underlined by the latest trade numbers' slowing non-oil, non-gold imports.

The bountiful monsoon will not, of its own, bring food prices down. This calls for removing the middlemen who swallow the huge margins between farm-gate prices and what the retail consumer pays. Abolishing the APMC Act, at least in the states run by the ruling party, is one way. Another is to invest in a chain of warehouses and cold storages, where farmers can store their produce in return for warehouse receipts which are now negotiable instruments and will be discounted at market prices rather than the arbitrary rates fixed by middlemen. The government must follow up on large public sector investment projects to see that clearances it has expedited translate into new tenders, awards and construction on the ground, so as to change the sentiment.

Even as the government sticks to its commitment to contain the fiscal deficit, a key driver of inflation, the RBI must hold its hand on rate hikes. Higher rates cannot squeeze out demand for food — non-food inflation is weak — until the economy's back is broken. That, clearly, is not a desirable course to pursue. Rather, the cost-push effect of higher real rural wages, welcome in themselves, has to be offset via higher productivity, to achieve which, the first step is to create incentives for farmers to invest in measures to boost yields and minimise waste. Public investment in transport and storage infrastructure will both boost growth and provide those incentives.